Bailouts Have Made Things Worse

The first thing to note about the financial crisis is that the federal government never had any business intervening in the personal decision of whether you want to own a home. There is no rational economic argument, or any argument I know of, that says the market of buying and selling homes is imperfect in some way, requiring government action. Construction firms have plenty of incentive to build homes and sell them. People who have the wherewithal have plenty of incentive to buy homes if they so choose. For the government to intrude into homeownership was an off-budget, nontransparent, backdoor attempt at redistributing income. And when the policy became a way of transferring income to people who couldn't afford those homes, it was doomed to failure.

All interest used to be deductable, just as interest earned was taxed.

THen they decided to not allow people to deduct interest they paid, but kept it for homes. In doing so, they took a general rule which only distorted markets a small amount (because you could deduct interest, you could pay more interest since it didn’t cost you the entire amount), and made it into a distortion in the housing market.

The people who owned houses at that time benefited, because the housing prices went up to reflect the extra amount people would pay for a house since the government would pay part of the mortgage through deductions. Ever since then though, it’s a wash, since new buyers have to pay the extra money reflecting the value of the deduction.

Worse, it actually benefits the rich more than the poor, since the deduction is more valuable to people with money. So they drove up the costs of homes making it harder for the poor to own them, while setting up a system where the marginal cost was less for a rich person than a poor person buying the same house.

The right thing to do would be to remove all taxes on all interest, earned or paid. That would remove the government from interference, housing prices would drop a bit, but then people would buy or rent based on their own economic situation, not based on how much they would get back from the government choosing one over another.

I don’t know if going back to taxing interest but deducting all interest paid would be helpful, since you’d still be able to deduct mortgage interest but not your rent.

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